Rating Rationale
January 25, 2018 | Mumbai
CRISIL revises outlook on public sector banks to 'Stable' from 'Negative' 
Recapitalisation, peaking of asset quality issues, revival in credit growth to improve outlook 
 
CRISIL has revised its outlook on the long-term debt instruments (excluding Basel III Tier I) of 18 public sector banks (PSB) to 'Stable from 'Negative', while reaffirming their ratings.
 
The revision in outlook is primarily driven by government's PSB recapitalisation programme for this fiscal, which will improve the financial risk profile of these banks and also help them meet Basel III regulatory capital norms, and provide cushion against expected rise in provisioning for non-performing assets (NPAs).
 
The ratings on Basel III Tier I bonds of nine PSBs have also been reaffirmed, and the outlook has been retained as 'Negative'. CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account and its implication on the availability of eligible reserves to service AT1 coupon payments. We will revisit our ratings on AT1 instruments once there is clarity.
 
On October 24, 2017 after the government announced its Rs 2.11 lakh crore recapitalisation plan, CRISIL had said that it was credit positive for public sector banks and when details of the capital infusion for individual PSBs are announced, it will consider those and take appropriate rating action.
 
On Wednesday, the government announced details of bank-wise infusion of ~Rs 88,000 crore capital this fiscal.
 
CRISIL has assessed the impact of this and believes with expected capital infusion from government, PSBs are now adequately placed to meet Basel III capital norms and are also better prepared to absorb the hit from provisioning on stressed assets and also on account of migration to Ind AS (Indian Accounting Standards).
 
The government has also outlined its banking reforms agenda. The strengthening of prudent lending practices through responsible banking - that is, banking based on core strengths, sharper pre- and post-disbursal monitoring for large exposures, and improving NPA resolution mechanisms (including separate asset management verticals), will structurally improve credit culture at PSBs.
 
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, 'The recapitalisation plan while emphasising government's support, also persuades public sector banks to up the ante on responsible banking. The upshot of more accountability, governance and efficiencies is a structurally stronger banking system and improved investor sentiment towards them'.
 
Asset quality issues are peaking for banks with incremental slippages to NPAs expected to taper in fiscal 2018 and 2019 as credit health of corporate borrowers' are improving. However, the resolution of large corporate stressed accounts under the Insolvency and Bankruptcy Code and the potential haircuts thereof are expected to increase the provisioning burden of PSBs and impact their earnings profile and capital position in the near term.
 
CRISIL will continue to monitor the performance of PSBs - their asset quality and profitability performance, and the capital support from the government in future and will appropriately factor in the same in the ratings of these banks.
 
Annexure 1 : List of rating actions on PSBs
Bank Tier II Bonds (Under Basel II & Basel III)/ Infrastructure Bonds Hybrid Instruments  (Under Basel II) Fixed Deposits Tier I Bonds (Under Basel III) Certificate of Deposits
Allahabad Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative)      
Andhra Bank CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA/Stable (Outlook revised from Negative)   CRISIL AA-/Negative (Reaffirmed)  
Bank of Baroda CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA+/Negative (Reaffirmed)  
Bank of India CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA+/Stable (Outlook revised from Negative)   CRISIL A+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Bank of Maharashtra CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)   CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Canara Bank CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Central Bank of India CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)      
Corporation Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative) FAA+/Stable (Outlook revised from Negative) CRISIL A-/Negative (Reaffirmed)  
Dena Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative)   CRISIL A-/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
IDBI Bank Ltd. CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative) FAA/Stable (Outlook revised from Negative) CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Indian Overseas Bank CRISIL A+/Stable (Outlook revised from Negative) CRISIL A-/Stable (Outlook revised from Negative) FAA/Stable (Outlook revised from Negative)   CRISIL A1+ (Reaffirmed)
Oriental Bank of Commerce     FAA+/Stable (Outlook revised from Negative)   CRISIL A1+ (Reaffirmed)
Punjab & Sind Bank CRISIL AA/Stable (Outlook revised from Negative)        
Punjab National Bank CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA/Negative (Reaffirmed)  
Syndicate Bank CRISIL AA/Stable (Outlook revised from Negative) CRISIL AA/Stable (Outlook revised from Negative)      
UCO Bank CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)     CRISIL A1+ (Reaffirmed)
Union Bank of India CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA+/Stable (Outlook revised from Negative)      
United Bank of India CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)   CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)

Bank of India
Rating outlook revised to 'Stable' ; ratings reaffirmed
 
Rating Action
Rs.1500 Crore Tier-II Bonds (Under Basel III) CRISIL AA+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.1500 Crore Tier-II Bonds (Under Basel III) CRISIL AA+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.3000 Crore Tier II Bonds (Under Basel III) CRISIL AA+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Upper Tier-II Bonds Aggregating Rs.2500 Crore (Under Basel II) CRISIL AA+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Perpetual Tier-I Bonds Aggregating Rs 1280 Crore (Under Basel II) CRISIL AA+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.1000 Crore Tier-I Bonds (Under Basel III) CRISIL A+/Negative (Reaffirmed)
Rs.1000 Crore Tier-I Bonds (Under Basel III) CRISIL A+/Negative (Reaffirmed)
Rs.500 Crore Tier-I Bonds (Under Basel III) CRISIL A+/Negative (Reaffirmed)
Rs.30000 Crore Certificates of Deposit CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised the rating outlook on the Tier II Bonds (under Basel III), and the Upper Tier-II Bonds and Perpetual Tier-I Bonds (hybrid instruments; under Basel II) of Bank of India (BoI) to 'Stable' from 'Negative', while reaffirming the rating at 'CRISIL AA+'. Ratings on the Tier-I Bonds (under Basel III) and certificates of deposit programme has been reaffirmed at 'CRISIL A+/Negative' and 'CRISIL A1+', respectively.
 
The outlook revision is primarily driven by government's recapitalisation plans for public sector banks (PSBs), including BoI, in the current fiscal. CRISIL believes this will improve the financial risk profile of BoI, help meet Basel III regulatory capital norms, and provide a cushion against expected rise in provisioning for non-performing assets (NPAs). Additionally, the peaking of asset quality concerns and likely revival of credit growth over the medium term will support banks' performance.
 
The ratings continues to factor the stress on BoI's asset quality especially in the corporate portfolio and therefore increase in provisions would continue to impact profitability over medium term. Gross NPA ratio was high at 12.6% as on September 30, 2017 (13.2% as on March 31, 2017). Also, profitability is modest with a return on assets (RoA) of 0.09% (annualised) for the six months ended September 30, 2017 (-0.3% for fiscal 2017).  However, proposed capital infusion of Rs 9232 crore in the current fiscal under the PSBs recapitalisation plan will help absorb increase in provisioning burden and meet regulatory capital requirement.
 
The ratings also continue to reflect the strong expectation of support from majority owner, Government of India; established market position; and comfortable resource profile. These strengths are partially offset by weak asset quality and earnings profile.  

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of BoI and all its wholly owned subsidiaries.

Key Rating Drivers & Detailed Description
Strengths
* Strong expectation of support from government: The ratings continue to factor in expectation of strong government support, both on an ongoing basis and in the event of distress. This is because government is both the majority shareholder in PSBs and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the government to support PSBs, including BoI. As part of the 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscals 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, government had outlined recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, of which PSBs will receive Rs 88,139 crore from the government in fiscal 2018. BoI has been allocated Rs 9232 crore out of this for the current fiscal.
 
* Established market position: BoI is the fourth-largest government-owned bank with total assets of Rs 6,28,185 crore as on September 30, 2017. National presence gives it the benefit of a wide distribution network and access to retail depositors. Downsizing of the corporate loan book has resulted in some reduction in market share over the last two years. While pressure on market position may persist in the near term, it would stabilise over the medium term on the back of BoI's extensive branch network.
 
* Comfortable resource profile: Resource profile is supported by a large deposit base and a comfortable low-cost deposit mix driven largely by strong presence in rural and semi-urban areas. Domestic low-cost current account and savings account deposits stood at 39.0% of total domestic deposits as on September 30, 2017 (39.8% as on March 31, 2017), compared to 34.2% as on March 31, 2016. The cost of deposits continues to be lower than industry average. Additionally, the bank has a sizeable international presence (around 22% of total deposits), which supports resource profile.
 
Weaknesses
* Modest asset quality: Asset quality has remained under stress with gross NPAs at 13.1% as on September 30, 2017 (13.2% as on March 31, 2017). Deterioration in asset quality was mainly due to higher slippages in the large and medium corporate advances portfolio, especially in the infrastructure and iron and steel exposures, which stood at 15.7% and 4.1%, respectively, of the total domestic advances as on March 31, 2017 (17.2% and 5.0%, respectively, as on March 31, 2016). Corporate book contributes the most in the gross NPAs. Asset quality is likely to remain under pressure in the near term, given the challenging macroeconomic environment and sizeable exposure to vulnerable sectors. Ability to arrest slippages mainly in the corporate loan book will remain a key rating monitorable in the near term.
 
* Weak earnings profile: Earnings profile has weakened considerably because of elevated credit costs and subdued growth in loan book. The RoA was 0.09% for the first-half of fiscal 2018 compared to -0.24% for fiscal 2017. Credit cost has remained elevated due to higher slippages and ageing of NPAs. Pressure on earnings will persist in the near term due to subdued credit growth, higher provisions, and pressure on margins. Higher treasury income and gain on sale of assets could offset some support to overall earnings.

Outlook: Stable (Tier II Bonds (under Basel III), Upper Tier-II Bonds and Perpetual Tier-I Bonds (under Basel II))
CRISIL believes BoI will continue to benefit from strong government support, especially given the recent recapitalisation announcement. Asset quality and earnings profile are, however, expected to remain under pressure over the medium term.
 
Upward scenario: The outlook may be revised to 'Positive' in case of a substantial and sustained improvement in asset quality and earnings profile.
 
Downward scenario: The outlook may be revised to 'Negative' in case of sharp deterioration in asset quality or earnings profile. 
 
Outlook: Negative (Tier I Bonds (under Basel III)
CRISIL believes the expected stress in BoI's asset quality and earnings profile over the medium term would also impact its eligible reserves position.
 
Upward scenario: CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account. Clarity on the same is likely to have positive implication on the availability of eligible reserves to service AT1 coupon payments and thereby the rating on the instruments.
 
Downward scenario: The rating may be downgraded in case of deterioration in eligible reserves position. The rating may also be downgraded if there is further significant deterioration in its asset quality or earnings profile. 
About the Bank

BoI is the fourth-largest PSB in India, with assets of Rs 6,28,185 crore as on September 30, 2017. The bank has a network of 5126 branches and 7717 automated teller machines across India as on September 30, 2017. A significant number of its branches cater to the rural and semi-urban areas. The bank has a strong presence in the corporate segment with the bulk of its business and earnings coming from the larger corporate clients. BoI has strong presence overseas with around 25% of its total business coming from outside India. Government shareholding in the bank is 72.52% as on September 30, 2017.

For fiscal 2017, the bank recorded a loss of Rs 1558 crore on a total income (net of interest expense) of Rs 18,598 crore, against a loss of Rs 6089 crore on total income (net of interest expense) of Rs 15,378 crore for fiscal 2016.

For the six months ended September 30, 2017, net profit was Rs 267 crore on total income (net of interest expense) of Rs 8759 crore, against loss of Rs 614 crore on total income (net of interest expense) of Rs 8743 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the six months ended September 30   2017 2016
Total Assets Rs crore 6,28,185 6,03,277
Total income Rs crore 22,707 22,133
Profit after tax Rs crore 267 -674
Gross NPA % 12.6 13.5
Overall capital adequacy ratio % 12.2 12.5
Return on assets % 0.09 -0.20

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
 Note on Tier-II Instruments (Under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer.  According to the Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI). CRISIL believes that the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Note on Hybrid Instruments (Under Basel II)
Given that hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.
 
Note on non-equity Tier-I capital instruments (Under Basel III)
The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity Tier-I instruments, over those of Tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL notches down the rating on these instruments from the bank's corporate credit rating. The rating on the Tier-I Bonds (under Basel III) has, therefore, been lowered by three notches from Bank of India's corporate credit rating, to 'CRISIL A+/Negative' in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks').
 
The factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III) resulting in non-payment of coupon include: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-1 (CET I; including Capital Conservation Buffer) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Outstanding  with Outlook
INE084A08078 AT1 - series II 22-Jun-16 11.50% Perpetual 1000 CRISIL A+/Negative
INE084A08086 AT1 - series III 23-Jun-16 11.50% Perpetual 500 CRISIL A+/Negative
INE084A09183 Upper Tier II - series IV 28-Aug-09 8.50% 28-Aug-24 500 CRISIL AA+/Stable
INE084A09209 Upper Tier II - series V 20-Jan-10 8.54% 20-Jan-25 1000 CRISIL AA+/Stable
INE084A09217 Upper Tier II - Series VI 6-Nov-10 8.48% 6-Nov-25 1000 CRISIL AA+/Stable
INE084A08037 Tier II - Series X 25-Sep-13 9.80% 25-Sep-23 1000 CRISIL AA+/Stable
INE084A08045 Tier II - Series XI 30-Sep-13 9.80% 30-Sep-23 500 CRISIL AA+/Stable
INE084A08060 Tier II - Series XII 31-Dec-15 8.52% 31-Dec-25 3000 CRISIL AA+/Stable
INE084A08094 Tier II - Series XIII 7-Jul-16 8.57% 7-Jul-26 1500 CRISIL AA+/Stable
INE084A09134 IPDI Series II 27-Sep-07 10.45% Perpetual 100 CRISIL AA+/Stable
INE084A09142 IPDI Series III 10-Nov-07 10.40% Perpetual 155 CRISIL AA+/Stable
INE084A09191 IPDI Series V 12-Sep-09 9.00% Perpetual 325 CRISIL AA+/Stable
INE084A09225 IPDI Series VI 9-Sep-10 9.05% Perpetual 300 CRISIL AA+/Stable
INE084A09167 Debenture IPDI 10-Feb-2009 8.90% Perpetual 400 CRISIL AA+/Stable
NA Debenture AT I* NA NA NA 1000 CRISIL A+/Negative
NA Certificate of Deposit NA NA 7-365 days 30,000 CRISIL A1+
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  30000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Lower Tier-II Bonds (under Basel II)  LT    --    --  27-01-17  Withdrawal  09-03-16  CRISIL AA+/Negative    No Rating Change  CRISIL AAA/Stable 
Perpetual Tier-I Bonds (under Basel II)  LT  1280  CRISIL AA+/Stable    No Rating Change    No Rating Change  09-03-16  CRISIL AA+/Negative  24-07-15  CRISIL AAA/Negative  CRISIL AAA/Stable 
Tier I Bonds (Under Basel III)  LT  2500  CRISIL A+/Negative    No Rating Change    No Rating Change  09-03-16  CRISIL A+/Negative    --  -- 
Tier II Bonds (Under Basel III)  LT  6000  CRISIL AA+/Stable    No Rating Change    No Rating Change  09-03-16  CRISIL AA+/Negative  24-07-15  No Rating Change  CRISIL AAA/Stable 
Upper Tier-II Bonds (under Basel II)  LT  2500  CRISIL AA+/Stable    No Rating Change    No Rating Change  09-03-16  CRISIL AA+/Negative  24-07-15  CRISIL AAA/Negative  CRISIL AAA/Stable 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating criteria for Basel III - compliant non-equity capital instruments

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